US Dollar rebounds despite concerns over labor market, rate cut expectations steady
- US Dollar DXY finds some footing closer to 104.00 as sellers seem to take a breather.
- Federal Reserve officials continue to maintain a cautious stance, with a rate cut expected in September.
- Concerns over the US labor market might weigh on the USD.
On Thursday, the US Dollar measured by the DXY index experienced a rebound, closing in on the 104.00 mark, despite concerns over the labor market. The rise came about as sellers appeared to hit the pause button. Market anticipations of a rate cut in September by the Federal Reserve and the frailty in the US labor market will be key topics to follow as they might put additional pressure on the currency.
The US economic outlook shows indications of disinflation, with financial markets expressing confidence in a rate cut in September. Despite this, Federal Reserve officials display reluctance to rush into interest rate cuts and still adhere to a data-dependent approach.
Daily digest market movers: DXY rebound, rising jobless claims raise alarms about the US labor market health
- Data from the US Department of Labor indicated a surge in Jobless Claims for the week ended July 13 by 243K, surpassing initial predictions of 230K, and worse than the prior gain of 223K (revised from 239K).
- On a positive note, the Philadelphia Fed Manufacturing Survey for July recorded a markedly greater improvement than expected, hitting 13.9 after recording 1.3 in June.
- Following the data, dovish bets on the Fed remain steady.
- According to the CME FedWatch Tool, a rate cut in September seems to be priced and limits the upside for the USD.
- If data continues to come in weak, markets might consider a cut in the upcoming July meeting.
DXY Technical Outlook: Bearish outlook continues, slight recovery to the upside seems probable
The DXY managed a rebound near the vicinity of the 104.00 area but the outlook remains bearish with the index below the 20,100 and 200-day Simple Moving Average (SMA). With daily technical indicators, like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), still languishing below 50, it indicates the weight of the bearish outlook has not subsided. However, the DXY index may see a minor correction to the upside in the forthcoming sessions.
The strong support levels remain at 103.50 and 103.00. However, the overall technical outlook continues to favor the bears.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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